Activists have decried Shein for years, calling out its devastating impact on the environment and exploitation of workers. But with a stroke of his pen, President Donald Trump appears to have upended Shein’s business model, making it harder for the Chinese fast-fashion brand to keep selling clothes at rock-bottom prices.
During the pandemic, Shein and online marketplace Temu exploded in popularity in the United States. Both companies manufacture low-quality goods in Chinese factories using cheap labor, then sell them to American consumers at extremely low prices. But Shein and Temu also had a distinct advantage over their competition. While American companies like Gap ship large quantities of inventory from overseas factories into U.S. warehouses—paying all the requisite taxes and tariffs—these Chinese companies ship products directly from factories to consumers’ houses. This allows them to take advantage of an obscure loophole in the U.S. tax code called de minimis, which allows packages containing less than $800 of merchandise to ship duty-free.
In 2022, Shein and Temu paid $0 in import taxes, whereas Gap paid $700 million and H&M paid $205 million. American and European brands pass their costs on to customers in the form of higher-priced goods, which has sent many shoppers looking for deals elsewhere. “This was their basic advantage,” says Kinshuk Jerath, a Columbia Business School professor. “[Shein and Temu] built their entire business model on de minimis.”
This week, that competitive advantage vanished, as Trump imposed a 10% tariff on all goods imported from China and also ended the de minimus tax exemption. Given how quickly these tariffs were rolled out, there’s a lack of clarity about exactly how much companies will have to pay. Logistics agents who import goods to the U.S. are already asking vendors to pay an extra 30% on the retail price of goods shipped from Hong Kong and China. Depending on the actual tariffs U.S. Customs imposes, these agents will either return part of that fee or seek additional payments.
Experts say Shein and Temu will have to raise their prices in response. And since these companies’ main selling point is their low prices, consumers may be less inclined to shop with them. This, in turn, could shake up the retail landscape in the U.S.
Could Shein and Temu find a way keep costs down?
While many were taken aback by how quickly Trump abolished the de minimus exemption, lawmakers from both parties have been trying to get rid of the loophole for several years.
The rule first came about in 1930, when most small-value packages were sent between individuals, and the government didn’t think it was worth the administrative cost for the tax revenue it would collect. In 2016, the exemption limit was raised from $200 worth of goods to $800, to further reduce the administrative burden. But then Shein and Temu entered the scene. They were almost single-handedly responsible for increasing the number of such shipments from 140 million in 2014 to 1 billion in 2023.
Many experts believe that Shein and Temu will have no choice but to raise their prices. These companies have already found ways to slash costs throughout the supply chain, leaving little room for cuts elsewhere. Shein has been accused of exploiting workers, forcing them into 17-hour shifts to make hundreds of garments a day at a base salary of $20, which would then be slashed by $14 if they made any mistakes.
While it is possible for Shein and Temu to absorb the cost of these taxes for a short time, Jerath doesn’t believe that’s a viable long-term strategy. “These companies do have big pockets,” he says. “But they will not be able to absorb costs indefinitely while keeping the company profitable. And the question is, if you have to keep selling at a loss forever, at what point is the business model no longer successful?”
Giacomo Santangelo, senior economics lecturer at Fordham University, says American companies like Amazon and Uber were willing to take a loss for some time in order to put their competitors out of business. “This strategy won’t work for Shein and Temu because there’s no chance they will be able to successfully wipe out their competitors,” he says.
Shaking Up Consumer Preferences
Forcing Shein and Temu to pay taxes levels the playing field for other brands. But perhaps more important, it changes the market, says Itamar Zur, CEO of Veho, a shipping company that serves brands like Macy’s, Sephora, and Stitch Fix.
With these ultracheap Chinese players on the market, many brands felt forced to compete on price. But as prices even out, brands can start competing across other dimensions, like the speed of delivery and quality. “Shipping products from China took seven to ten days, but consumers were willing to wait to get their products at such low prices,” Zur says. “But if it costs the same or just a little more to buy from a U.S. brand that can ship the products in two days, many consumers might opt for the U.S. brand.”
Shein does have some warehouse space in the U.S. that allows it to ship products faster. It has already started driving American customers to buy products shipped locally by prioritizing these items in search results. Zur says that Shein may shift more of its inventory to U.S. warehouses, but this would effectively upend its business model. Until now, Shein has made products on demand based on consumer preferences. It adds 2,000 to 10,000 new items to its website every day, and mass-produces only the items that consumers seem to like. But if the company chooses to warehouse clothes in the U.S., it will need to predict what consumers will want to buy weeks in advance and send that inventory over. And, of course, this inventory would be taxed.
Brands might also start to compete on the make and longevity of a product, Zur says. Shein and Temu are known for selling very low-quality products, and if they raise their prices, consumers may opt to shop for items that are more durable. “As a consumer, your entire calculation changes when these ultralow prices are off the table,” he says. “If you’re going to spend more money, you might not want your T-shirt or dress to be disposable. In fact, you might choose to spend a few dollars more for a shirt you can wear for years.”
While Trump’s tariffs have the capacity to transform the market and consumer behavior, Fordham’s Santangelo warns that things are changing quickly and it’s still possible that the administration will reverse its decisions. Trump was going to impose a 25% tariff on Mexico and Canada on Tuesday, but decided to postpone for 30 days; it’s unclear whether those tariffs will eventually take effect. “It’s a very fluid situation,” Santangelo says. “We can’t really make predictions because everything might change again overnight.”
